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Devan v. Phoenix American Life, 4th Cir. (2005)
Devan v. Phoenix American Life, 4th Cir. (2005)
In re: MERRY-GO-ROUND
ENTERPRISES, INC.,
Debtor.
DEBORAH H. DEVAN,
Plaintiff-Appellee,
No. 04-1646
v.
PHOENIX AMERICAN LIFE INSURANCE
COMPANY,
Defendant-Appellant.
IN RE MERRY-GO-ROUND ENTERPRISES
COUNSEL
ARGUED: Morton Alfred Faller, SHULMAN, ROGERS, GANDAL, PORDY & ECKER, P.A., Rockville, Maryland, for Appellant.
Cynthia Louise Leppert, NEUBERGER, QUINN, GIELEN, RUBIN
& GIBBER, P.A., Baltimore, Maryland, for Appellee. ON BRIEF:
Stephen A. Metz, SHULMAN, ROGERS, GANDAL, PORDY &
ECKER, P.A., Rockville, Maryland, for Appellant. Deborah H.
Devan, Jason M. St. John, NEUBERGER, QUINN, GIELEN, RUBIN
& GIBBER, P.A., Baltimore, Maryland, for Appellee.
OPINION
KING, Circuit Judge:
In this appeal by Phoenix American Life Insurance Company
("Phoenix American"), we are called upon to decide whether interest
payments made by a debtor on post-petition life insurance policy
loans constitute avoidable transfers under 549(a) of the Bankruptcy
Code. Phoenix American maintains that the claim of the Trustee for
the estate of debtor Merry-Go-Round Enterprises, Inc. ("MGRE")
should have been denied because such interest payments are not,
under the statute, avoidable "transfer[s] of property of the estate." 11
U.S.C. 549(a). In the alternative, Phoenix American asserts that the
interest payments made by MGRE were authorized by statute and the
bankruptcy court. Both the bankruptcy and district courts disagreed
with Phoenix American, ruling that interest payments made to Phoenix American by MGRE on post-petition life insurance policy loans
were avoidable transfers. As explained below, we affirm.
I.
A.
In January 1985, MGRE, a retail clothing business operating
approximately 1,442 stores nationwide, entered into separate but identical retirement agreements with ten of its executives, providing each
of them an annual retirement income of approximately $100,000,
IN RE MERRY-GO-ROUND ENTERPRISES
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commencing at age 65 (the "Retirement Agreements"). On September 1, 1985, MGRE purchased ten identical group life insurance policies from Phoenix American to fund the Retirement Agreements (the
"Insurance Policies" or "Policies").2 The Insurance Policies designated the executives as the insureds and MGRE as sole owner and
beneficiary of the policies. Pursuant to the terms of the Insurance Policies, total annual premiums of approximately $191,500 were payable
to Phoenix American by MGRE on September 1 of each policy year.
The Insurance Policies also provided that interest on outstanding
loans was due and payable on September 1 of each year. If such interest was not timely paid, it was charged as an additional loan against
a policys cash value and added to the policys loan balance. Finally,
the Insurance Policies provided that they would be cancelled if a policys loan balance exceeded its cash value. In order to pay the annual
premiums due in 1986, 1987, and 1988, MGRE obtained loans from
Phoenix American on the Insurance Policies on September 1 of
each year against the accumulated cash values of the Policies, for
an outstanding loan principal of approximately $575,000. For each of
the years 1989 through 1993, MGRE paid the annual premiums on the
Insurance Policies when they were due, plus interest on the outstanding loans. These payments were made by MGRE from its cash flow,
without resort to any policy loans.
On January 11, 1994 (the "Commencement Date"), MGRE filed a
Chapter 11 bankruptcy petition in the District of Maryland, seeking
court protection in the reorganization of its business operations. On
the Commencement Date, MGRE filed an "Emergency Motion for
Authority to Make Payment in Full of (1) Payroll, (2) Reimbursable
Employee Expenses, and (3) Employee Benefits." By this motion,
MGRE disclosed the existence of the Insurance Policies, including the
annual premiums of approximately $191,500, plus accrued annual
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and (3) minus accrued interest on the outstanding loans for the preceding policy year (September 1, 1995, through August 31, 1996) of
$169,827.32 ("Interest Payment II").
B.
On September 2, 1997, the Trustee initiated an adversary proceeding against Phoenix American in the bankruptcy court seeking to
recover the sum of $1,616,144.81 for the loans Phoenix American had
made on the Insurance Policies after the Commencement Date, i.e.,
Loans I and II (collectively, the "Loans"), and the two interest payments made by MGRE on those loans, i.e., Interest Payments I and
II. The Trustee contended that the Loans and Interest Payments I and
II were unauthorized post-petition transfers under 11 U.S.C. 549,
which provides, in relevant part, that "the trustee may avoid a transfer
of property of the estate . . . that occurs after commencement of the
case . . . [and] that is not authorized under this title or by the court."
11 U.S.C. 549(a)(2)(B) (the "Statute"). On March 31, 1999, after the
parties filed cross-motions for summary judgment, the bankruptcy
court granted summary judgment to Phoenix American with respect
to the Trustees claims on the Loans. However, the court denied any
relief to Phoenix American with respect to Interest Payments I and II,
concluding that they may have constituted unauthorized post-petition
transfers under the Statute, and preserving that issue for trial. Devan
v. Phoenix Am. Life Ins. Co. (In re Merry-Go-Round Enter., Inc.), No.
94-5-0161-SD, slip op. at 6-9 (Bankr. D. Md. Mar. 31, 1999) (granting in part and denying in part motion for summary judgment)
("Bankr. Op. I").
On September 12, 2003, the parties filed renewed motions for summary judgment on the Trustees claims relating to Interest Payments
I and II, and the parties agreed that these motions should be heard
together at the bench trial scheduled for November 3, 2003. In connection with the summary judgment motions and the upcoming trial,
the parties, on October 20, 2003, filed the Joint Stipulation with multiple exhibits. The court thereafter conducted the bench trial and rendered an oral opinion in favor of the Trustee on Interest Payments I
and II. Devan v. Phoenix Am. Life Ins. Co. (In re Merry-Go-Round
Enter., Inc.), Tr. of Judges Decision Only, No. 94-5-0161-SD
(Bankr. D. Md. Nov. 3, 2003) ("Bankr. Op. II"). Pursuant thereto, on
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Robins Co., 68 B.R. 705, 711 (Bankr. E.D. Va. 1986) ("[C]ourt
approval is not a perfunctory step and assumption by conduct cannot
be sanctioned by this Court.").
b.
Next, Phoenix American maintains that the Interest Payments were
authorized by 363(c)(1), as payments made "in the ordinary course
of business," and thus should not have been avoided under the Statute.
11 U.S.C. 363(c)(1).6 Phoenix American asserts that MGRE made
the Interest Payments to maintain the Insurance Policies for the purpose of funding, in the ordinary course of its business, the benefits
due to its executives under the Retirement Agreements. Both lower
courts disagreed with this contention, however, finding that the Interest Payments failed to qualify as being made "in the ordinary course"
of MGREs business under 363(c)(1). Because the bankruptcy court
resolved the "ordinary course" issue by a factual determination, we
may set it aside only if it is clearly erroneous. Harman v. First Am.
Bank of Md. (In re Jeffrey Bigelow Design Group, Inc.), 956 F.2d
479, 481-82 (4th Cir. 1992); see also United States v. Singh, 363 F.3d
347, 354 (4th Cir. 2004) ("A factual finding is clearly erroneous
when, through our review of the evidence, we are left with the definite and firm conviction that a mistake has been committed."). And
because, on careful consideration, we are left with no firm conviction
that a mistake has been committed here, we are unable to identify
clear error in this finding.
In resolving this contention, we are content to adopt the reasoning
of the district court, that is, that Phoenix American failed to carry its
burden of proving that the Interest Payments qualified as "ordinary
course of business" transactions. See Dist. Op. at 241; see also Fed.
R. Bankr. P. 6001. Phoenix American presented no evidence either
that (1) obtaining life insurance policy loans in the maximum allowable sum were common practice in its industry, i.e., the operation of
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other purposes."). And when this issue was raised on appeal to the
district court, that court aptly observed, "[a] bankruptcy court is
deemed to be in the best position to interpret its own orders, and thus
a courts interpretation of its own order must be given substantial deference." Dist. Op. at 242 (relying on Colonial Auto Ctr. v. Tomlin (In
re Tomlin), 105 F.3d 933, 941 (4th Cir. 1996)).
Phoenix American also asserts that, because the bankruptcy court
deemed interest payments on pre-petition loans as authorized by its
April 11, 1994 Order, the Interest Payments themselves must also
have been authorized. See supra Part I.B; see also Bankr. Op. II at 910 ("I do draw a distinction here as a matter of fact between the post
petition loan and the policy loan interest being made on that . . . and
the pre-petition policy loan obligations that were paid post-petition.").
In its emergency motion filed on the Commencement Date, MGRE
disclosed to the bankruptcy court that it would be required to make
interest payments on pre-petition loans of approximately $50,000, but
the post-petition interest payments were in fact nearly three times that
sum. In that circumstance, we see no error in the bankruptcy courts
finding that the Interest Payments (for loans obtained post-petition)
were not authorized by the April 11, 1994 Order, which merely permitted "honoring and maintaining" the Retirement Agreements (not
the withdrawal of an unprecedented $1.3 million from the Insurance
Policies). Furthermore, as we have observed, a bankruptcy court is in
the "best position to interpret its own orders." Colonial Auto Ctr., 105
F.3d at 941. According the appropriate deference to that courts interpretation of its April 11, 1994 Order, the Interest Payments were not
authorized by the bankruptcy court. Therefore, the Interest Payments
were neither authorized by the Bankruptcy Code nor the bankruptcy
court.
IV.
Pursuant to the foregoing, we affirm the judgment of the district
court.
AFFIRMED